Debt Crisis Live Blog: Rate Decision Day

Welcome back to our live blog, which will be covering rate announcements by both the European Central Bank (11:45 GMT) and the Bank of England (11:00 GMT), news on the euro-zone debt crisis and market movements.

The BOE has kept rates at 0.5% but surprised many by announcing that it will inject £75 billion of new quantitative easing.

The ECB’s also left key interest rates unchanged. Attention then turned to ECB President Jean-Claude Trichet who gave his last ever press conference (12:30 GMT) before the curtain came down on his eight-year reign.

Wipe that tear away, this will be Jean-Claude Trichet’s last ever European Central Bank rate meeting. Read our curtain-raiser here by Brian Blackstone, which assesses his legacy after eight years as ECB President.

Taking our eye away from the debt crisis for one moment, Europe’s political leaders and captains of industry have queued up to pay tribute to Apple co-founder Steve Jobs who has passed away. See their tributes here.

Here’s what Irish Prime Minister Enda Kenny said: “Steve Jobs was a creative genius who broke down walls in business and opened doors in people’s minds. His innovative prowess in the area of technology has brought about a level of access to information for millions that few would have ever foreseen.”

The amount sold was at the top of the target range. The offer of April 2014, October 2014 and April 2015 bonds drew €8.567 billion in bids, giving a bid-to-cover ratio, or gauge of investor demand, of 1.9 for the amount sold.

A London-based bond trader said the auction was “strong,” and said that private-sector investors had been buying Spanish debt prior to the auction. This is a shift from the recent pattern, where the European Central Bank has been the only major buyer.

German stock prices are likely to be resilient Thursday, since the chances of the ECB announcing no new measures Thursday are slim, traders in Frankfurt are predicting.

Only if the ECB keeps rates on hold this afternoon and offers no additional measures, such as another 12-month liquidity tender or covered bond purchases on the open market, are stock prices likely to drop, traders say.

If no rate move is provided but some other measures are announced, disappointment will be mild and short-lived, one trader notes. However, should the central bank deliver the mostly unexpected move of cutting rates, stock prices will shoot much higher, another trader adds.

Further news on troubled Franco-Belgian bank Dexia from Alessandro Torello in Brussels who discloses that it is in negotiations with a group of international investors to sell its Luxembourg unit. Its share price is currently down 9.5% at €0.924. Read more here.

Some thoughts here from Dow Jones Newswires EMEA currencies editor Katie Martin on what the EBB will announce… answer is nobody knows.

“Central bank rate decisions are supposed to be boring. Easy to predict, easy to judge the likely reaction.

Not this one from the ECB.

As a flavor of the predictions for the likely outcomes at 1145 GMT, we have Deutsche Bank looking for a rate cut of half a percentage point, Barclays Capital expecting a quarter-point trim with some tinkering to bolster liquidity, and Credit Suisse expecting a new six-month Long-Term Refinancing Operation.

Some expect the central bank to restart its program of buying covered bonds. Some don’t. Some think those LTROs could have longer maturities. You get the idea.

Meanwhile, no-one seems to know how to trade the euro once the decision is out. All things being equal, a rate cut, especially a big one, should hit the currency hard. But some brave souls reckon this time is different. Rather than hurting the currency as a sign of panic and a big hit to yields, it could boost it.

At least the ECB would be doing something to try and help the economy through these testing times.

You may think it’s good news that Dexia is likely to be saved and that this has helped EU bank shares tick up in early trade. But Margot Patrick, Dow Jones’ banking reporter, has done some digging and reckons it’s likely to be a short-term fillip.

As she notes: “Within just a couple of days, investors have moved on from speculating about which bank might be next to fail after Dexia, and are instead taking comfort that the European Union may finally be getting its act together to recapitalize banks and restore confidence.

“As recently as Tuesday, Dexia was being heralded as the first in a series of banking dominoes. Now, a plan by the French and Belgian governments to carve it into a good and bad bank and sell some units seems to have cheered everyone but private shareholders, who may still be wiped out.

“European bank shares have rallied about 8% in two days, mainly because German Chancellor Angela Merkel indicated she is open to discussing much-needed E.U.-wide efforts to provide new rounds of state aid and organize bank recapitalizations. Expectations of further support to the flagging global economy from central banks including the U.S. Federal Reserve have also revived investors’ hopes.

New round of quantitative easing had not been a question of ‘if’ but ‘when.’ There had been speculation that the BOE could hold off until November. Evidently they judged the state of the U.K. economy to be so precarious that they moved now.

The bank had already pumped £200 billion by buying assets. This is the first time QE had instigated since 2009. Here’s what the BOE say, but you can read some choice words below.

“The pace of global expansion has slackened, especially in the United Kingdom’s main export markets.

“Vulnerabilities associated with the indebtedness of some euro-area sovereigns and banks have resulted in severe strains in bank funding markets and financial markets more generally. These tensions in the world economy threaten the UK recovery.

“In the United Kingdom, the path of output has been affected by a number of temporary factors, but the available indicators suggest that the underlying rate of growth has also moderated.

“The squeeze on households’ real incomes and the fiscal consolidation are likely to continue to weigh on domestic spending, while the strains in bank funding markets may also inhibit the availability of credit to consumers and businesses.”

Crucial passage here from the BOE statement. Expects asset buying program to take four months to complete. The Bank of England’s governor Mervyn King is pictured, right.

“The deterioration in the outlook has made it more likely that inflation will undershoot the 2% target in the medium term.

In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the Committee judged that it was necessary to inject further monetary stimulus into the economy.

“The Committee therefore voted to increase the size of its asset purchase programme, financed by the issuance of central bank reserves, by £75 billion to a total of £275 billion.

“The Committee also voted to maintain Bank Rate at 0.5%. The Committee expects the announced program of asset purchases to take four months to complete.

Here’s what Howard Archer, an economist for IHS Insight, thinks of the BOE announcement.

In an early note, he writes: “The Bank of England’s decision… is no great surprise given the clear increasing risk of recession.

“The fact that the MPC chose to act now on QE and to go for £75 billion rather than £50 billion reflects the fact that they believe an already difficult outlook for the economy has deteriorated amid mounting domestic and global headwinds, notably including squeezed consumer purchasing power, slowing global growth, financial market turmoil and mounting concerns about the funding conditions facing banks as the euro-zone sovereign debt crisis deepens.

Oh dear, when you enter government sometimes statements you’ve said in opposition come back to haunt you.

Rising Labour MP Chuka Umunna, the Shadow Minister for Small Business and Enterprise, has reminded U.K. Chancellor George Osborne on Twitter what he said back in January 2009 when the first round of QE was under way.

Back then the Chancellor of course was shadowing the then Labour Chancellor of the Exchequer Alistair Darling.

“Quantitative easing is the last resort of desperate governments when all other policies have failed”

“I don’t think anyone should be pleased that we have reached this point.

It is an admission of failure and carries considerable risk. Let us hope that this approach taken by the Bank of England does lead to an easing of credit conditions. This is a leap in the dark and we will see whether it works.”

Here’s Dow Jones Newswires take on the ECB announcement by Tom Fairless.

“The European Central Bank Thursday left its benchmark interest rate unchanged at 1.5% for a third straight month, opting not to unwind its recent rate hikes despite a worsening debt crisis.

The decision—which was widely expected—comes after euro-zone inflation jumped to 3% on the year in September, from 2.5% the previous month.

Market observers will now turn to the ECB’s monthly press conference, due at 1230 GMT, where ECB President Jean-Claude Trichet will face questions about the bank’s interest rate path.

There is little doubt that Mr. Trichet, who is holding his last press conference before his eight-year term ends on Oct. 31, will indicate that the ECB is preparing to cut interest rates for the first time since May 2009.

Economic sentiment indicators have significantly worsened since the last rate meeting, and the bank expects inflation to fall below its target of “below, but close to, 2%” next year.”

First off, the SNB revealed that it has so far spent almost nothing on dousing down the franc. Then the Bank of England upped its bond-buying target in an effort to kick-start the UK economy.

So the market was braced for something shocking from the European Central Bank. And it got, well, nothing.

The decision itself was a full minute late hitting traders’ screens—enough to test some already strained sense of humor levels to the limit. And then the ECB announced that it was keeping rates on hold at 1.5%.

As the euro had already tumbled in preparation for another shock, there was little more room for the currency to fall, but it did take a cool dip against all the other major currencies.

At the time of writing, the euro is at $1.33 against the dollar, having fallen as low as $1.3265. Against the yen, it’s at the same level as it held before the decision, at Y102.

Next up, Jean-Claude Trichet’s swansong at 1230 GMT. This is where the fun is likely to really start.

David Cottle, a senior columnist for Dow Jones Newswires, has picked up on an interesting fact: corporations didn’t issue a single euro-denominated bond in August.

As he notes:

“Given the euro zone’s endless debt crisis, it’s hardly surprising that the world’s corporations didn’t feel like getting their hands on any more of a currency whose disintegration was being openly discussed on the front pages.”

“Shares in troubled Franco-Belgian bank Dexia fell sharply Thursday, reversing earlier gains, with local news reports saying that the Belgian government is moving in favor of nationalizing the domestic unit. Dexia’s share price, was down almost 15% at one stage, and was off 12% at €0.91 at 1120 GMT. The stock was up nearly 10% after the opening.

Shares reversed after Belgian media reported that the government’s preferred option was to nationalize the Belgian unit of the bank and after the bank said it had entered into exclusive negotiations with “an international group of investors” for the sale of its Luxembourg retail unit, one of the stronger parts of the company.

“If the ECB President describes inflation risks as ‘to the downside’ over the medium term, rather than ‘broadly balanced,’ analysts would take that as a strong sign that the ECB plans to cut rates as soon as November.”

Trichet disappoints some analysts hoping for a rate cut, but does unveil new loans to banks with maturities up to 13 months, and ECB will resume covered-bond purchases. So basically two out of three on the wish-list of financial markets.

“This is my last press conference. I remember my first press conference eight years ago if it were yesterday. I want to tell you that it has been a great pleasure to have this dialogue with the press, each of us with our different responsibilities…

For more than four years we have experiencing turbulent waters, storms, hurricanes…”

To add, Trichet urges banks to reinforce their balance sheets and retain earnings. Says banks must return to the market to boost capital and says they should avail of government recapitalization plans.

The European Central Bank has decided Thursday to restart its buying of bank bonds and to hold two separate tenders of year-long refinancing to euro-zone banks, President Jean-Claude Trichet said Thursday, in an effort to stave off an impending liquidity crisis.

Chairing his final press conference at the end of eight years at the helm of the ECB, Trichet said the bank will buy up to €40 billion in covered bonds issued by banks, starting in November. The bank will make its purchases in both the primary and secondary markets and expects to have completed the program by October 2012.

In addition, the ECB will offer a 12-month tender of liquidity in October and a tender with an approximate maturity of around 13 months in December. Both will be of an unlimited size.

Furthermore, Mr. Trichet said the bank will continue to offer unlimited liquidity at its one-week and one-month operations at least until July next year.

The measures “will continue to ensure that euro-area banks are not constrained on the liquidity side,” Mr. Trichet said.

“It appears some ECB members may have preferred a rate cut Thursday. After a ‘long discussion’ weighing pros and cons of reducing rates and keeping them steady, the ECB decided ‘by consensus’ to keep rates unchanged, Trichet says. ‘Consensus’ is ECB-speak for some dissent.

Martin Essex, Dow Jones Newswires’ European Markets editor, gives his take on the latest talk about recapitalizing struggling banks.

“If my local grocery store loses too much money because hard-pressed shoppers are going to the supermarket down the road, which charges less, there is no talk about saving it. The store is allowed to fail.

“So if a bank loses too much money, why does it have to be rescued? Why not let it fail too?

“There is much talk about the need to support banks because of their vital role in providing money to households and small businesses. But if the last few years have taught us anything, it’s that many households are now in trouble because they borrowed too much.”

Concerning monetary policy, there were no particular hints that there will be a rate cut at the 3 November meeting (the first to be chaired by incoming President Draghi).

Overall, this would suggest that if the ECB is still to lower its main policy rate, which is what we expect given the deteriorating economic environment (with moderating inflation pressures), then this would be more likely on 8 December (after the conclusion of the quarterly Eurosystem macroeconomic projections and monetary assessment).

“The loss of access to funding markets, a problem that has gained in intensity over the summer, has threatened the existence of one of Europe’s largest banks in recent days, bringing French-Belgian lender Dexia SA to the verge of collapse.

However, Mr. Trichet said it would be inappropriate for the ECB to lend to Europe’s main bailout vehicle, the European Financial Stability Facility.

A number of both U.S. and European politicians—not least the European Union’s Economic and Monetary Affairs Commissioner Olli Rehn—have urged that the EFSF be given a banking license, which would allow it to borrow from the central bank.

However, a number of ECB officials have said this would break the terms of the EU treaty on monetary financing of governments.

Mr. Trichet again blasted governments for their “inadequate” governance of the euro zone over the first decade of the single currency’s life. He called on them to show “inflexible determination” to safeguard their own credit and speed up structural reforms, particularly in their labor markets.

Elsewhere, Mr. Trichet said the risks to the economy “remain to the downside in an environment of particularly high uncertainty,” whereas the risks to medium-term price stability remain “broadly balanced.”

Unfavorable effects on financial markets are likely to dampen the pace of growth in the second half of the year,” Mr. Trichet said, but gave no hint that the bank expected a recession.”

Trichet’s final press conference ends with a question on whether he has preserved the ECB’s Bundesbank roots. His response: “I was considered in France the clone of my friend [former Bundesbank head] Hans Tietmeyer. Have we delivered price stability [in the euro zone]? Yes. Have we delivered price stability in Germany? Yes.”

Spain’s approach to recapitalizing its banks could land the country with Irish-style problems, according to David Roman from our Madrid bureau.

He interviewed Jesus Fernández-Villaverde, a prominent blogger and professor of Economics at the University of Pennsylvania. In his view, Spain’s authorities are wrong to be looking for someone to take on rotten bank CAM’s assets and liabilities, and probably should liquidate the savings bank instead.

Fear of an Irish outcome is the number one argument for liquidation, Mr. Fernández said.

Short-dated German bond yields rise as Trichet stops short of signalling an imminent rate cut and instead emphasises the role of non-standard measures, chiefly providing liquidity to the banking sector and buying covered bonds.

“These measures will help at the margin, but they are small in scale,” says Stewart Robertson, senior economist at Aviva in London.

“The ECB should have done more and will eventually have to do so, including significantly lower policy interest rates.”

Mr. Trichet’s comment that today’s decision was not unanimous suggests that “euro-zone interest rates will be lowered soon, but it is too late to prevent a stagnation in growth,” he adds.

U.S. stocks on Thursday tilted slightly lower after U.S. jobless claims rose less than expected last week and European Central Bank President Jean-Claude Trichet spoke of increased downside risk to the region at his monthly news conference.

“Dexia’s woes come as European leaders discuss the reality that Europe’s banks may need recapitalization sooner rather than later. Work is already underway on some aspects of this, European Commission President Jose Manuel Barroso said earlier Thursday following a meeting with Finnish Prime Minister Jyrki Katainen.

“We are already in the process of preparing certain aspects,” Mr. Barroso told reporters in the VIP corner of the European Commission building here. “It may be necessary to make more efforts as the situation in the market has changed, following the last stress tests.”

“Although they didn’t mention Dexia by name, Mr. Katainen compared the situation to that following the collapse of Lehman Brothers in 2008 and 2009, and stressed the need for a common effort across Europe.

“Europe is full of good and sound banks which are suffering from tangible uncertainty which has gone on for too long.

“We have to ensure there’s not a new financial crisis which comes from the uncertainty, without any more important reason,” the Finnish PM said.

“The Bank of Portugal Thursday cut its economic forecasts for the country for next year, as government austerity measures depress consumption and a slowdown in the global economy weighs on exports.

In its autumn economic bulletin, the central bank said it now expects the country’s gross domestic product to shrink 2.2% next year, more than the 1.8% contraction it had expected in its last bulletin.

However, it also raised its GDP projection for this year slightly, and now expects the economy to contract 1.9% this year compared with its previous estimate of a 2% contraction.

Portugal’s economy is expected to remain sluggish as the government strives to comply with the goals set under the €78 billion bailout agreement with the European Union and the International Monetary Fund.”

“The International Monetary Fund loan program mission to Greece is expected to conclude within days, an IMF spokesman said Thursday.

The IMF, European and Greek officials have been negotiating for weeks on the next tranche of a joint EUR110 billion emergency bailout loan. Failure to meet fundamental program targets has held up disbursement, however.”

With euro-zone inflation now close to peaking, and activity data in the area likely to remain generally soft in the weeks ahead, economists James Ashley and Gustavo Bagattini at RBC Europethink it is now only a matter of time before the consensus on the ECB Governing Council swings in favour of reversing its refi rate back down to 1.0%.

“It is possible that the Governing Council may reach that point as early as next month, but we think a 50bp cut (back to 1.0%) is more likely in December when inflation will no longer be heading higher and policymakers will have the benefit of published 2013 macroeconomic projections for the first time,” they say.

“In light of today’s press conference, we now expect the ECB to cut its refi rate by 50bp, to 1.0%, at the December meeting.”

“Any assumptions that the SNB has been busy supporting the euro against its own currency with market intervention were proved wrong Thursday when the central bank published data showing that its foreign reserves had barely risen since the new policy was introduced and the gains that had been made were largely due to changing valuations and currency swaps.

“In other words, the bank achieved its policy goal of driving the franc lower and helping its beleaguered exporters without spending a proverbial single centime.”

The FTSE 100 ended 3.7% higher at 5291.26, with investors thrilled that the BOE held rates while announcing a move to pump liquidity into the market. Bank stocks rose as euro-zone leaders look set to announce recapitalization plans.

The Euro Stoxx 50 ended 3.2% higher at 2248.78. The ECB’s holding of its key interest rate disappointed some, but there was obvious cheer among investors that the central bank announced new liquidity measures. Meanwhile, banks were in focus again as EU leaders looked at recapitalization options. ECB President Trichet “made no secret of his view that solving the sovereign debt crisis ultimately lies in the hands of euro-zone governments,” said Rabobank.

German Chancellor Angela Merkel said Thursday that if the need arises one shouldn’t hesitate to recapitalize banks.

“The damages that arise otherwise would be much greater in scale,” Mrs. Merkel said at a press conference after a meeting with the heads of the International Monetary Fund, the World Bank, the European Central Bank and the Organization for Economic Co-operation and Development. If needed, state help should be granted, she added.

Politicians should take seriously the advice of experts from around the globe who reckon banks don’t have sufficient capital, she added.

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